Adani Ports and Special Economic Zone added welcome diversification to the Indian credit universe on Wednesday with the first debut investment grade issue by an Indian borrower in two years and the first ever investment grade issue by a domestic infrastructure company.
The $650 million deal marked something of a coming of age for the Adani family, which runs the ports, energy and mining conglomerate and is fast pushing its way into the upper echelons of India's private sector firmament.
The bond issue came from its ports and logistics arm, which has also progressed from running one port to eight in the space of just four years. Smaller rivals have been gobbled up as it eats into the market share of the country's once dominant public sector operators.
Its growth also mirrors the geopolitical ambitions of Prime Minister Narendra Modi, who has been challenging China's proposed Maritime Silk Road with his own plans to re-establish India's historical trading links with its neighbours through Project Mausam — so named after the monsoon winds that once helped speed ships across the Indian Ocean.
However, investors remained divided over where Adani should price.
On the one hand, Adani group companies look set to become benchmark borrowers, building out a liquid yield curve and establishing a well-known brand name. Local newspapers, for example, speculate that Adani Transmission wants to raise up to $1 billion in the dollar bond market.
But the debt being undertaken to finance current and future expansion plans has also raised questions about a potential deterioration in credit metrics. Covenants attached to the deal include debt to net tangible worth below three times and a debt service coverage ratio above 1.1 times.
Had recent volatility not made debt issuance difficult it seems likely that Adani would have raised up to the $1.5 billion speculated in the domestic press and pushed the maturity out to ten years. Proceeds are being used to re-finance $750 million of secured debt, which is one year shorter in duration and carries higher interest costs.
In the end, Adani Ports opted for a five-year deal and upsized the issue size from $500 million to $650 million on the back of a $1.04 billion order book.
Pricing was fixed at 99.524 on a coupon of 3.5% to yield 3.605% or 195bp over Treasuries. This was 15bp inside of initial guidance around the 210bp mark.
About 36% of the paper went to the US, with 34% to Asia, 24% to the Middle East and 6% to Europe. By investor type, 45% went to fund managers, 41% to banks, 10% to insurance companies, 3% to private banks and 1% to a sovereign wealth fund.
A flotilla of comparables
The deal has a Baa3/BBB-/BBB- rating. Bankers cited Bharti as the nearest Indian private sector comparable since it has the same rating but a much more prominent brand name. Its eight-year paper is currently trading on a Z spread of 201bp.
Indian Railway Finance Corp, a similarly rated public sector borrower, has five-year paper at a Z spread of 155bp.
Bankers said that some investors looked at Indonesian state-owned port operator Pelindo. It has a split Baa3/BB+ rating and issued a 10-year bond earlier this year.
The 4.25% 2025 transaction immediately traded down in the secondary and is still bid below its issue price at 94.13, equating to a Z spread of 263bp.
Closer to home, Dubai-based DP World also has a Baa3 rating and five-year paper trading around the 165bp on a Z spread basis.
Higher up the rating scale Baa1/BBB+ rated Hutchison Ports has five-year paper around the 136bp level.
"Adani has priced slap bang in the middle between Pelindo and DP World," said one banker. "It needed to come wide of comparable Indian credits because it's a debut borrower and not as well known. This level feels right."
And he added, "Generally India is trading quite tight at the moment and while accounts wanted to diversity their portfolios there would have been resistance to pushing pricing much further."
In its investor marketing presentation, Adani flagged how well its metrics stack up against other Asian port operators.
The exception is debt to Ebitda.
At the end of 2014, this stood at 4.5 times, down from 4.9 times in 2013 but above DP World on 4 times and Pelindo on 3.6 times. Hutch Ports is the highest of the closest comps on 4.9 times.
However, Adani also pointed out that its Ebitda margin ended 2014 at 63%. This was higher than Hutch on 55%, DP World on 42% and Pelindo on 28%.
Its 8.2% return on assets came second to Pelindo's 8.4% but above DP World's 4% and Hutch Ports' 1.4%.
But revenue growth is far outstripping its comparables because of its rapid expansion. From 2013 to 2015 it has grown by a compound annual growth rate of 24% compared to 9% for Pelindo, 5% DP World and 0% Hutch Ports.
At the end of 2014, Adani accounted for 12% of Indian cargo throughput, with private sector operators as a whole standing at 44%, up from 23% in 2007. By 2020, Adani forecasts the private sector group will have equal 50/50 billing with public sector operators.
Its main port and adjoining SEZ is at Mundra on the west coast and accounted for 110 million metric tonnes of cargo in FY15, or 75.8% of its total throughput for the year. By 2016 it forecasts total throughput of 175 million metric tonnes, rising to 233 million by the end of 2018.
Adani Ports has already outlined capex of about $700 million, although domestic newspapers speculate on future acquisitions including Kattupali Port in Tamil Nadu, a greenfield port in Kerala and the purchase of a 31.5% stake held by Warburg Pincus in Gangavaram Port in Andhra Pradesh.
"I don't think Adani will make many more big acquisitions in India," said one observer. "If anything expansion will be outside of India to gain access to ports around the Indian Ocean in Africa and the Middle East."
In addition to Adani Ports' strong stand-alone metrics, management have also highlighted the group's overall synergies since the operator ships much of the coal producer's output from the East to West coast (cheaper than overland rail).
According to its investor presentation total debt was $2.899 billion at the end of March, with net interest expenses of $93.9 million.
Joint global co-ordinators for the bond deal were Bank of America Merrill Lynch, Barclays, Citi and Emirates NDB Capital. SBI Capital was also a joint lead.